The business behind the show

Redbox expands to video games as DVD business stabilizes [Updated]

April 28, 2011 | 3:28
pm

Redbox is expanding into video game rentals as its parent company reported improved financial performance for the first quarter.

The kiosk DVD rental company said that after testing video game rentals for nearly two years, it will on June 17 begin offering titles such as Call of Duty and Super Mario Galaxy in more than 21,000 of its 31,800 locations around the country.

Games will cost $2 per night, compared with $1 for DVDs and $1.50 for Blu-ray discs.

On a conference call Thursday with analysts, Paul Davis, chief executive of Redbox parent company Coinstar Inc., said tests have indicated that the company can increase revenue by making 10% to 15% of the titles in its kiosks video games. It also allows the company to reach a different demographic than parents in grocery stores or drug stores picking up movies to take home.

"We think now that with $3, $1 for a movie and $2 for a game, you can appeal to the whole family," he said.

The news comes as Redbox is recovering from a weak fourth quarter during which it over estimated demand for DVDs. Much of the problem resulted from certain studios' decision to block Redbox from offering their DVDs until 28 days after they go on sale.

As a result, while business at kiosks continued to grow at a healthy clip, bottom-line results were more muted. Redbox revenue increased 38% from the first quarter of 2010 to $362.3 million. Even excluding new locations added in the last year, "same stores sales" jumped 15.3%.

However, Redbox's operating margin -- the amount of operating income it earned on each dollar in revenue -- dropped to 14% from 17.6%, as the holiday season inventory problems continued early in the first quarter. Total Redbox operating income was $23.7 million in the quarter, down 2% from the previous year.

Coinstar stock was up 8% in after-hours trading Thursday on the news, along with slightly improved guidance for the full year. Before financial results were released, Coinstar stock closed up 2% at $51.41.

-- Ben Fritz

[Updated on May 4 at 7:16 p.m.: An earlier version of this post incorrectly stated that 10-15% of the slots in Redbox kiosks would be taken up by video games. In fact, 10-15% of the titles in the kiosks will be video games.]